The defined benefit (DB) pension transfer market has caused a lot of problems for the advice industry, with rising professional indemnity insurance premiums and pension scheme scandals.
The Financial Conduct Authority (FCA) set out a range of measures in June 2020 designed to address weaknesses, in a bid to transform the space.
This included steps to reduce conflicts of interest by banning contingent charging, as well as help for advisers “who want to do the right thing and provide good quality advice to their customers”.
Benchmarking
The FCA has also said that, from 1 October, IFAs who are recommending a transfer out of a DB scheme will need to benchmark the proposed destination for the funds against a low-cost workplace pension.
But many of these workplace pensions were designed for automatic enrolment and regular contributions by active members rather than large transfers in from DB pension schemes by members approaching retirement.
In the current DB market, most transfers are to self-invested personal pensions (Sipps), personal pensions or retirement products such as drawdown accounts. Relatively few transfers are to master trusts or to the existing workplace pension of the transferring member.
The FCA has expressed concern that some of the products currently commonly used for transfers come with multiple tiers of charges and may represent poor value.
In order to put pressure on advisers to justify these charges, and to drive costs down, the FCA will now require advisers to benchmark the proposed investment product against transferring into the clients’ workplace pension, which may well offer a lower cost.
International Adviser spoke to several members of the industry to discuss the FCA’s benchmarking plan.
Contentious area
Andrew Tully, technical director, Canada Life, said: “Given most people now have a workplace scheme it is sensible it is considered as a possible home for any transfer.”
Steven Cameron, pensions director at Aegon, said: “This is one of the most contentious areas of the FCA’s new rules.
“If an adviser is recommending a transfer other than into the default fund of a workplace pension, they’ll need to demonstrate why this is not just as suitable, but more suitable, than a workplace pension.
“The new rule will certainly focus advisers’ minds on workplace as well as non-workplace pensions, but the key will be to be clear on when, at individual level, a non-workplace pension will be more suitable.”
Justin Corliss, senior pensions development and technical manager at Royal London, said: “It’s difficult to say if this will work prior to the rules coming into force on 1 October 2020, but advisers in the pension transfer market are very aware of it.”
Flaws
Recently, pension consultancy firm Lane, Clark & Peacock (LCP) carried out a survey and found that there are two reasons why the benchmarking concept may not achieve the desired goal.
“The FCA increasingly expects DB transfers to be suitable only for those approaching retirement, some of whom will not be members of a workplace pension scheme; an adviser can therefore explain that this comparator is not relevant to this particular client,” LCP said in a statement.
“Even where the transferring member is a member of a master trust, LCP’s survey suggests that the limited options offered by master trusts may mean that it would still not be a suitable destination for a large DB transfer.”
Cameron added: “The default fund for a workplace scheme is designed to be broadly appropriate for all members of all ages and at all levels of contribution.
“What’s right for a 22-year old being auto-enrolled and paying in £30 ($39.30, €33.40) a month may be far less so for a 59-year-old with a £500,000 transfer value about to take an income.
“That same individual may be seeking a particular pension freedom option and not all workplace pensions offer the full range.
“Some workplace pensions also don’t facilitate adviser charging, so the individual may face paying a separate fee which is less tax efficient.”
Benefit the client
The FCA said in June that the changes to the DB transfer market were looking to “support” customers who are considering whether to transfer out of a scheme or who have already transferred out.
So, will the benchmark idea actually benefit the client?
Canada Life’s Tully said: “Many people will be better served by staying in their DB pension. It is unlikely that a client who is some years away from seeking to take benefits should transfer, and that is recognised in the rules from the regulator.
“And transferring someone out of a DB scheme to an individual arrangement simply because it allows them access to a wider range of funds is unlikely to be a sufficient reason to show the individual arrangement is more suitable than the client’s workplace pension.
“However, the rules also show that some clients may benefit from moving to an individual arrangement, if the client is an experienced investor, within 12 months of taking benefits, and any workplace scheme to which they belong doesn’t provide a range of flexible income options which meet the client’s individual needs.”
Royal London’s Corliss said: “The vast majority of advisers in this market care about their clients and make every attempt to identify the best solution for them.
“However there have been instances, perhaps best illustrated by the issues surrounding the British Steel Pension Scheme (BSPS), where pension transfer customers have been transferred into complex and expensive plans with high product and exit charges.
“It’s quite possible that had this rule been in force at that time, some of the less suitable client outcomes could have been avoided.”
Alternatives
If the concept that the FCA is bringing in is “contentious” and does have flaws, is there anything else that the UK regulator could implement?
“There are no alternatives. It’s a case of stay in the DB scheme, transfer to a workplace scheme or to an individual arrangement,” Tully added.
Corliss said: “It’s a reasonable rule which has always been there it has just been ‘beefed up’, a bit moving from ‘as suitable’, to ‘more suitable’. The important thing is that clients and advisers appreciate what it is saying.
“The rule doesn’t say you must use the workplace pension scheme, rather if another option is chosen there needs to be robust analysis on the file as to why this is a more suitable option.”
Aegon’s Cameron said: “The key is for the FCA to take a balanced approach to when advisers recognise at individual level that a non-workplace pension is more suitable, and don’t challenge advisers inappropriately.”
Future of the market
The DB pension transfer market has changed rapidly over the last few years, especially with the FCA crackdown.
So, does this mean that the future for the space is bleak?
“The pension freedoms have lit the imagination of savers in all pension types and the ability to control your capital, income and death benefits will continue to drive demand for transfer advice,” Tully said.
Cameron added: “It remains a hugely important market. While the FCA’s interventions are all well intended, there is a very high chance that the supply of advice will continue to fall, as a result of the changes in rules including the ban on contingent charging and also the great difficulties in obtaining affordable PI.”
Corliss said: “The ban on contingent charging, where the adviser is only remunerated if there is a positive recommendation to transfer, and that transfer goes ahead, is likely to reduce the supply of advice in this market.
“This could result in some people being unable to find an adviser to provide this advice, or unwilling to pay an advice cost into the thousands of pounds for advice which may be to do nothing and remain in the DB scheme.
“The danger is that a transfer may have been suitable for some of these people but if they don’t receive the advice, they won’t know, and the transfer won’t take place – you have to take advice on pension transfers over £30,000 before you can transfer.
“The ‘carve-out’ which allows clients who meet certain criteria to continue to be charged on a contingent basis will alleviate this to some degree, but the FCA expects only around 11% of consumers will meet the criteria for the carve-out.”
